Crypto Lender Celsius Network and Former CEO Face Potential CFTC Lawsuit for Rule Violations

News | July 7, 2023 By:

Investigators at the Commodity Futures Trading Commission (CFTC) have concluded that crypto lender Celsius Network and its former CEO, Alex Mashinsky, violated US regulations prior to the company’s collapse, according to BNN Bloomberg citing sources familiar with the matter. If the majority of the CFTC’s commissioners agree with this determination, the agency may file a case in federal court as early as this month.

The CFTC’s enforcement unit, after conducting a confidential investigation, found that Celsius misled investors and should have registered with the regulator. The investigators also concluded that former CEO Alex Mashinsky broke regulations. However, the CFTC declined to comment on the matter.

In addition to the CFTC’s investigation, the Securities and Exchange Commission (SEC) and federal prosecutors in Manhattan have also been looking into Celsius, as revealed in bankruptcy filings. The status of these probes by the SEC and the US Attorney’s Office for the Southern District of New York remains undisclosed.

Celsius Network gained significant popularity during the pandemic by offering loans and providing higher interest rates on virtual token deposits compared to traditional finance. Mashinsky frequently positioned the platform as secure as traditional banks. However, a combination of the collapse of the token TerraUSD and the downturn in the crypto market resulted in significant losses for Celsius. Despite denying the severity of the losses, the company faced numerous customer withdrawals and ultimately filed for bankruptcy protection in July 2022.

Celsius Network was founded in 2017 by Alex Mashinsky, who previously worked in the telecommunications industry. The company raised funds through an initial coin offering and grew into a multi-billion dollar business by offering interest to customers who lent out their crypto tokens.

The collapse of Celsius has already led to legal action, including allegations from New York Attorney General Letitia James, accusing Mashinsky of making false statements about the platform’s safety and misrepresenting the company’s financial condition. In response, Mashinsky has sought to dismiss the claims, arguing that they demonstrate a misunderstanding of Celsius’s business.

If the CFTC proceeds with a federal enforcement action against Celsius and Mashinsky, it would be one of many cases brought by US authorities this year. The CFTC was the first to sue Binance Holdings Ltd. and its CEO, Changpeng Zhao, while the SEC has sued Binance and Coinbase Global Inc. Both exchanges maintain their innocence.

CFTC Chairman Rostin Behnam recently stated that the regulator has brought over 85 cases related to fraud and manipulation in the digital asset market, resulting in substantial penalties and restitution. The CFTC asserts jurisdiction over Bitcoin and Ether, considering their commodities, and claims authority over suspected fraud or manipulation involving these cryptocurrencies, as well as certain stablecoins and derivatives.

In May, Fahrenheit LLC, led by investment firm Arrington Capital, won an auction to acquire some of Celsius Network’s assets.